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GNC's future darkens with grim Q1 financial report
Executives acknowledge Chapter 11 bankruptcy is possible, as company doesn't have funds to significantly reduce debt by Saturday.
4 Min Read
GNC Holdings Inc. sank deeper in the red during the first quarter of fiscal 2020 and could face filing for Chapter 11 bankruptcy within days.
The company reported Monday that comparable-store sales in the United States and Canada dropped 10.1%, contributing to a net loss of $220.1 million in the first quarter, which ended March 31. But the bigger black cloud obscuring the company's future is the $895 million debt that will come due on Saturday.
The company is trying to extend the imminent springing maturity date, which will be triggered if GNC has more than $50 million outstanding debt that day.
"We've been working to address our capital structure," CEO Ken Martindale said during Monday's conference call. Besides talking to lenders, "the company continues to explore all options to refinance and restructure its indebtedness, including discussions with various lender groups around the comprehensive capital structure transaction."
At the end of the quarter, the company had $137.4 million cash available, including $30 million it has borrowed from its revolving credit facility, Chief Financial Officer Trista Tolivar said. As of Monday, the company had $127 million in cash after it borrowed another $30 million in April, she added.
"We are currently in discussion with the lenders to move the springing maturity and believe the parties will see, it is in everyone's best interest to do so. This will, by no means, be an easy year for GNC, regardless of our past as we continue to optimize our store footprint, reduce costs and reopen our temporarily closed stores," she said.
If GNC Holdings can't refinance or restructure, it likely will have to file for Chapter 11 bankruptcy to implement a restructuring plan, Tolivar said.
Pandemic reduced traffic, closed stores
Most of the drop in same-store sales was due to the COVID-19 pandemic, according to the company. Adjusted for the pandemic's effects, same-store sales dropped 4.4%.
The company saw customer traffic start to fall in early March, and the trend worsened as the month went on, Martindale said. While some jurisdictions considered GNC stores to be essential businesses, many stores ended up closing.
"In some cases, we made business decisions to close certain stores as a result of declines in traffic," the CEO said. "We also shuttered stores as shopping malls closed around the country, and in a number of areas, we were forced by local directives to temporarily close."
On the last day of the quarter, 30% of the company-owned and franchised stores in the United States and Canada were closed because of the pandemic, the company reported. By the end of April, 40%—approximately 1,400 locations—were closed, in addition to about 25% of its international stores, Martindale said About 100 stores have reopened since, but 3,800 store employees and more than 200 corporate staff members are on furlough until at least the end of May.
The company's supply chain also has been affected, as its transportation network has been inconsistent and manufacturing availability has challenged GNC's ability to meet demand for wellness and immunity products, the CEO said.
"Clearly, we will continue to see a significant negative impact on our operating performance in the second quarter, and we anticipate the earnings pressure to continue to a lesser degree throughout 2020 when we expect sales to begin to recover barring a substantial second COVID wave," he added.
GNC has added a buy-online/ship-from store option for customers, allowing it access $80 million of inventory from closed stores to fulfill e-commerce orders. The option was scheduled to roll out later this year, but the company moved to implement it sooner because of the pandemic. E-commerce accounted for 10.6% of revenue in the U.S. and Canada, compared with 7.4% in the first quarter of 2019.
"This challenging environment is requiring us to be fast, nimble and develop new operational functionality for the future," Martindale said.
Financial results show drastic drops from 2019
As noted above, GNC saw a net loss of $220.1 million in the first quarter, compared with a net loss of $15.3 million in Q1 2019. The adjusted net loss was $11 million, compared with adjusted net income of $19 million a year ago.
The 10.1% drop in same-store sales in the U.S. equaled a $35.8 million decrease.
The company reported other financial decreases compared with Q1 2019, as well:
Revenue in the U.S. and Canada fell $65 million, or 13.3%, to $424.2 million, compared with $489.2.
Consolidated revenue for the quarter totaled $472.6 million, a 16.4% decrease from $564.8 million.
Operating loss was $131.2 million, compared with operating income of $52.1 million.
Diluted loss per share was $2.45 compared with $0.23. Adjusted loss per share was $0.19, compared with adjusted earnings per share of $0.15.
Adjusted EBITDA was $31 million or 6.6% of revenue, compared with $66.9 million, or 11.7% of revenue.
Reasons for the revenue decrease, in addition to lower sales, were store closures under the store-optimization strategy; sales declines in the second half of March because of the pandemic; and the transfer of Nutra manufacturing to a joint venture.
In response to the pandemic, GNC cut costs by implementing employee furloughs, reducing its spend on marketing and reducing store hours. It also cut inventory purchases and capital expenditures.
In fiscal year 2019, GNC lost $35.1 million, with comparable-store and e-commerce sales falling 2.9%.
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